1/31/2009 @ 12:55PM

The Steal Of The Century

Desperate times invite desperate deals, and the proposed Chrysler alliance with
Fiat
is about as desperate as they come. Put simply: Fiat gets Chrysler and a factory to build its cars here in North America. Chrysler does not get a single dollar or a single share of Fiat stock in return. Yes, Chrysler will get technology assistance from Fiat, but it could be several years before that helps Chrysler sell any vehicles.

The Chrysler camp brags that the deal gives the Detroit company Fiat’s
technology–the secrets of its engines, platforms and transmissions that would be particularly useful to build small cars, like the little Fiat 500, Panda or Punto, but this does not mean Fiat will import cars from Italy or Poland (where it builds the Fiat 500). This deal is all about building Fiat-like models under the Chrysler brand in North American factories.

How long would it take before we see the first of these Chrysler-Fiats roll into U.S. showrooms? For reference, it took two years for Chrysler to drop a new body (the Challenger) atop a Chrysler platform already in production. Starting almost from scratch with Fiat mechanicals–managing the tooling, training the workers, dealers, etc.–will be much more complicated.

It is taking
Ford Motor
three years to get its Ford Fiesta small car into production in Mexico. Keep in mind that Ford owns all that technology, is already building the car in Europe, and that its engineering and manufacturing people all speak English. It is reasonable to figure it would take Chrysler three years to get Fiat-type cars in production in North America.

Note, too, that none of Fiats current cars meets U.S. regulations. This means Fiat and/or Chrysler must redesign and re-engineer these vehicles for the U.S. market.

In short, we are unlikely to see U.S.-produced Fiat-like Chrysler models until 2012 or 2013, and that’s a long way off, especially given Chryslers current sales collapse. Chrysler people also talk of getting help from Fiat in sales abroad. Fiat is strong in Italy and Brazil, but has next to no business in China, the worlds fastest-growing market.

Chrysler is strong in pickup trucks and minivans, but the best market for those vehicles is right here in the U.S., not overseas. So it is a little hard for me to see how Fiat can be of much help selling existing Chrysler vehicles. As for Jeep, it’s had a foreign presence for 50 years. If Chrysler needs Fiat to help sell Jeeps abroad, it is in real trouble.

It is easy to figure out what Fiat wants. The company has said it wants a production base in North America to build its Alfa Romeo, and probably Fiat cars. A quarter-century ago, Fiat quit selling the Fiat brand here; today it sells just a few thousand Ferraris and Maseratis in America.

The deal with Chrysler gives Fiat a way to re-enter the mass market, a factory to build these vehicles and dealers to sell them. One rumor is that the new partners will produce the cars in Mexico, in a plant now building the Chrysler PT Cruiser and Dodge Journey crossover sport utility.

I am an admirer of Fiat Group Chief Executive
Sergio
Marchionne
Sergio Marchionne
and the job he has done. He led an amazing turnaround: Fiat was profitable in 2008 and he expects it to make money this year, but Marchionne is worried about long-term survival. Here is what he said in a recent interview with European Automotive News:

You need at least 5.5 million to 6 million cars [a year] to have a chance of making money. It is not just the absolute number of cars that matters, but the volume associated with each architecture. Fiat is not even halfway there. And we are not alone in this. So we need to aggregate, one way or another.

Marchionne called the volume producers, like his own Fiat, the Wal-Marts of the auto business.

Independence in this business is no longer sustainable. I cannot continue to work on cars on my own. I need a much larger machine to help me. I need a shared machine.

Fiat is looking at [this new] world and saying it is going to be a marginal player unless it acts.

These words explain why Marchionne is interested in Chrysler, but why would Chrysler accept the deal–giving up a 35% stake for no cash, just the technology, and another 20% if Fiat wants it later?

I see two probable explanations. The first is that Chrysler has lost so many key technical people that it probably could not engineer and produce all the new models it needs, even if it had the money. The other explanation? Chrysler must show the U.S. government a turnaround plan by Feb. 17. The Fiat deal might look good to the people who’ll have to approve the $3 billion in bridge funds still available for Chrysler.

Chrysler has had a long history of failed foreign deals, investments, joint ventures and the like. Its sad history includes Rootes, a U.K. automaker; Simca, a French company; Mitsubishi; Daimler; and the Chrysler TC by Maserati. For a short period, it also owned Italian supercar manufacturer Lamborghini, which I believe it sold at a profit.

Will it matter that our taxpayers may pump $7 billion into a company which, if it succeeds and turns around with that money, a foreign company will control? In all fairness, as Chrysler President Jim Press recently noted, Southern states have poured taxpayer money to build plants for foreign auto companies, and these businesses have been quite successful for those states.

More importantly, what are Chryslers chances? Based on December sales, it is still running about 10% of the U.S. market, its pickup truck and minivans are good and the Jeep franchise remains valuable. The problem is that Chrysler is weak in cars–particularly small cars–and all the talk of possible failure is scaring off what little business there is in this ugly downturn.

A Fiat affiliation could help forestall the Chrysler bankruptcy talk and help the company through next few quarters. Beyond that, Chrysler and Fiat have a lot of work ahead of them.